IMF sees long and severe slowdown

The current global recession is likely to be "unusually long and severe, and the recovery sluggish," the International Monetary Fund has warned.

Slowdowns linked with financial crises tend to be severe, while synchronised slowdowns last longer, it said.

The current global crisis has also been strongly felt in emerging economies, it said in its World Economic Outlook.

The global links between financial sectors have intensified the speed the downturn has spread across the world.

The recession will be less severe if government spending increases, the IMF says, with fiscal policies seen as more effective than monetary policy

Detailed forecasts for individual countries are set to be released next week, ahead of the IMF's spring meeting in Washington.

In March, the organisation predicted that the world economy would suffer its first global recession in 60 years, declining by between 0.5% and 1.0% in 2009.

Synchronised

Since World War II, the typical recession lasts for a year, with a recovery lasting five years.

But, the report says, recessions linked to financial crises, such as the current one, tend to last much longer.

The recoveries following these slowdowns are then often held back by weak private demand, as households try to save more.

A synchronised slowdown - where many of the world's economies are in recession at the same time - lasts one and a half times longer than a typical recession.

“ The current recession is likely to be unusually long and severe, and the recovery sluggish ”
IMF

"This combination is historically rare," the report said, but these two factors do suggest that this current downturn will be "persistent" with a "weaker-than-average recovery".

Aggressive monetary and fiscal policy measures are needed to support demand in the short term, adding that restoring confidence in the financial sector is critically important if policies are to be effective.

The problems in the financial sector have quickly spread from the US and the UK to other countries.

The IMF has expressed scepticism that enough is being done to restore the financial system to health in the advanced economies.

Emerging blow

The IMF also warned that the financial crisis is having far-reaching effect on emerging economies, particularly in Eastern Europe.

It says that globalisation has strengthened the transmission mechanisms which will deepen the crisis.

The strong presence of Western European banks in emerging Europe has meant that banks' liquidity problems are being felt in these countries.

"Given their large exposure, emerging European economies might be heavily affected," it said.

This may mean there will be a protracted decline in capital flows to these countries, it added.

And the IMF says it could be a long time before such flows return to developing and emerging market countries.

With the financial crisis intensifying, more countries are coming to the IMF for help and its supply of funds to loan may run out.

Poland has recently asked for a $20bn loan, joining a number of other Eastern European countries, including Ukraine, Hungary and Lithuania.

At the recent London summit, the G20 agreed that the IMF should triple its available resources to $750bn, to ensure that it had enough money to offer loans.

Other IMF countries are pledging this money. Japan, for example, has already offered to loan the IMF $100bn and the EU says it will put in $100bn.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8000529.stm

Published: 2009/04/16 16:11:49 GMT